World Applied Sciences Journal 35 (5): 754-766, 2017 ISSN 1818-4952 © IDOSI Publications, 2017 DOI: 10.5829/idosi.wasj.2017.754.766 Corresponding Author: Celina Chinyere Udude, Department of Economics, Ebonyi State University Abakaliki, Nigeria. 754 Testing the Validity of Okun’s Law in Nigeria: An Autoregressive Distributed Lag Approach (1980-2013) Celina Chinyere Udude and D.N. Nnachi Department of Economics, Ebonyi State University Abakaliki, Nigeria Abstract: This study examined the relationship between unemployment and economic growth in Nigeria using an Autoregressive Distributed Lag Approach. Specifically it determined the validity of Okun’s law in Nigeria. It equally examined if there is significant long run relationship between growth rate and unemployment rate in Nigeria within the period under study. The study employed ex-post facto research methodology using Nigeria’s data obtained from CBN statistical bulletin between 1980 and 2013. The empirical analysis started with the conduct of unit root test to determine the stationarity status of the series employed using Augmented Dickey Fuller test and Philip Peron, the result of which indicates that RGDP was stationary at level while unemployment rate and inflation rate were stationary at first difference. This led to the use of Autoregressive Distributed Lag Approach from where it was found that Okun’s law does not hold for Nigeria. The sign borne by unemployment as found from this result did not meet the apriori expectation. The result also indicates that in the short run, unemployment does not influence the economy. Though Okun’s law does not hold in Nigeria, it was found that unemployment influences RGDP significantly in the long run. Therefore, the study recommended that government should adopt stringent policies which will help to create employment opportunities so that unemployment level will be reduced drastically in the long run. This can be achieved by creating friendly environment for business which will as well trigger off economic growth. Key words: Unemployment Economic growth Okun’s law Policies INTRODUCTION though the developed countries have been curtailing the One of the greatest challenges of the Sub-Saharan countries, especially in Africa, unemployment has been African economies today is the high rate of on a continuously accelerating rise in the economy, unemployment that has maintained a rising trend over the culminating in reduction of household income and living years. The problem of unemployment has been of great standards and concomitant rise in the level and incidence concern to the economists and policy makers in Nigeria of poverty [1]. since early 1980s. The effect of financial crisis on public The theoretical proposition relating output and and private sectors has led to renew attention on the unemployment has been proposed by Okun (1962) [2]. phenomenon. It is a widely accepted view in economics This relationship is among the most famous in that the growth rate of the Gross Domestic Product (GDP) macroeconomic theory and has been found to hold for of an economy increases employment and reduces several countries and regions mainly, in developed unemployment. Unemployment is an important issue in countries [3]. Okun’s (1962) [2] postulates a negative developing economies as high unemployment means that relationship between movements of unemployment rate labour resources are not being used efficiently. Hence, the and real gross domestic product (GDP) by focusing on the goal of full employment is usually a major macroeconomic empirical relationship between unemployment and GDP goal of any government because it maximizes output. variations. He emphasized that as a result of changes in Unemployment is seen as a great problem to global aggregate demand, industry changes their production economic development. In recent years, both developed pattern which leads to changes in demand for labour and developing countries have witnessed this problem, which alter the unemployment rates. Okun (1962) [2] rate of their unemployment. However, in developing